GlobalData: Russia capital programs continue despite low crude prices

Anna Belova, GlobalData upstream analyst covering the Former Soviet Union, said oil production surge outside OPEC is deemed one of the driving factors behind the recent decline in global crude prices. The behavior of main crude suppliers in the near term will determine if the global supply will equilibrate with the demand for oil. However, suppliers differ in their ability to respond to price changes and in their longer-term intentions to secure market share. Russia, the world’s leading energy producer, has been steadily increasing its crude output. Since the factors behind the past production increase are expected to remain in place, Russian crude output is likely to continue at current levels in the near term.

"At the outset, understanding of the main drivers in Russian production increases during the past decade is essential. The country has added over 1 MMb/d to the global crude supply over the period. The past year, 2014, marked a new record in post-Soviet oil production in Russia. Buoyed by rising crude prices, the Russian oil industry rebounded from the 1990s production crush brought on by the collapse of the Soviet Union,” Belova said.

"The first factor responsible for the Russian production surge is new greenfield developments coming online during the last 10 years. While many new fields came from existing production centers, some were located in newer frontier provinces. The bounty of the Volga-Urals and West Siberian basins, which at their peak produced 4.5 and 8.2 MMb/d, respectively, was not replicated in any of the new oil regions. However, the multitude of targeted frontiers, ranging from the shelves of the Caspian and Pechora Seas to East Siberia, allowed for a significant production surge. The three largest new East Siberian fields, Vankorskoye, Talakanskoye, and Verkhnechonskoye, alone accounted for over 800,000 b/d of additional crude production by 2014,” Belova said.

"The second factor behind the decade-long production growth in Russia is the extensive capital campaign aimed at older brownfield developments. With around 6000 new wells drilled every year, Russia’s producing well inventory increased significantly over the decade,” Belova said. "What is more important is the increasing productivity per well achieved by more complex completions. Multilateral and horizontal wells were drilled in Russia first in the 1950s and fracturing with water, acid, and alkali widely implemented since the 1970s. Russian operators are now standardizing employment of more complex well configurations in infill drilling.

"At the Vyngapurovskoye oil field, which has been in production since 1982, a new conventional well was recently drilled to a total depth of 4400m with a lateral of almost 1000m, with eight stages of hydrofracturing – a Russian record. This example is not limited to this Gazrpom Neft field but is a representation of a wider trend, where over a half of Russia’s new conventional oil wells are completed using complex technologies yielding more hydrocarbons,” Belova said. "Furthermore, the wave of consolidation that swept the industry over the past decade resulted in over 85%, or 9,079,333 b/d, of Russian oil being produced by only six oil companies. These large companies realize the economies of scale when employing advanced well technologies unavailable to smaller operators in Russia or elsewhere in the world. Complex wells carry higher costs, but for every 50% of additional capital expenditure, average initial well flows double with advanced completion methods. Operators’ ability to effectively drill large numbers of conventional and complex wells lends a high degree of flexibility to Russian supply.”

"Global crude prices began their decline in July 2014; however, Russian oil production continued to increase. Ruble devaluation reduced the marginal cost of production and transportation, while Russian oil tax rates also decreased with crude prices,” Belova said. "Consequently, the effect of global price decline on the netback revenue per barrel for Russian operators has been less pronounced than with other geographies. Moreover, most capital costs will also decrease in dollar-denominated terms since exploration, drilling, and infrastructure contracts are usually denominated in Russian rubles.

"The Russian oil and gas industry is relatively self-sufficient when it comes to conventional onshore and shelf production, even with complex methods of recovery routinely employed. However, the ruble-denominated costs are expected to be subject to high inflationary pressures, with the official rate for 2015 predicted to average 15%,” Belova said. "Within the five-year horizon, the factors that were behind a decade-long production surge are expected to sustain Russian production. The large new fields in frontier provinces act as anchoring production hubs for neighboring smaller developments. Production drilling began on Rosneft’s Suzunskoye, which will be connected to the giant Vankorskoye field in East Siberia, while Lukoil’s Filanovsky field in the Caspian Sea is benefitting from synergies with Y. Korchagin field – the company’s first foray into offshore production.

Belova continued:

"In addition to new field tie-ins within frontier regions, additional small fields will be brought online within the established basins. In 2014, Lukoil alone brought online 17 new fields, most located within the company’s operating base in West Siberian and Volga-Urals Basin. The development of field extensions, or new fields, and intensive infill drilling campaigns within mature fields with complex well completions, supplemented with secondary and tertiary recovery methods, will continue to offset production declines from mature fields.”

"While a production surge has a short-lived effect if accomplished through severe reserve depletion, Russian oil reserve replacement has outpaced production growth over each of the past eight years. This reserve base growth was accomplished through direct investment in exploration, funded through both the federal budget and individual companies’ geological exploration allocations. Close to 500 oil fields have been discovered in Russia during the last decade. However, the new fields are responsible for about 20% of new reserves, according to Rosnedra (Russian Resource Agency), with the majority of reserve increases coming from continuing exploration of existing fields.”

"In terms of recent discoveries, the Pobeda field in the Kara Sea has received a fair amount of attention, with close to 1 billion barrels of official oil reserves, as well as significant gas reserves. More interesting is the Velikoye field, located within the Pre-Caspian Basin in the south, where official reserves were estimated at over 2 billion bbl. The Pre-Caspian basin was well studied during the Soviet era, with over 100 fields discovered within Russia and Kazakhstan, but only Kashagan is of the same scale as Velikoye. Both share significant challenges due to reservoir depth and high sulfur content, yet Velikoye is onshore within a well-developed industrial area with mild environmental conditions.”

"The main factors that drove the decade-long production surge in Russia will remain in effect, even in the low-price environment. Current production levels will be sustained within the five-year horizon through continuous drilling in established production centers, with new fields coming online in both frontier and existing petroleum provinces.”

"Long-term prospects are the most price sensitive, including potential production from the Bazhenov Shale and other low-permeability formations, as well as Arctic offshore developments. These projects are targeted by the US/EU sanctions on technology transfer; however, even without sanctions, they are not competitive in the current price environment."